Rent vs. Buy

If you are thinking of buying a home, chances are you’re wondering whether it is a better deal to buy or rent. With interest rates and home prices as low as they are, you hear everyone telling you to buy! buy! buy! The reality is depending on the amount of time you plan on spending in an area, you may want to rent. Trulia made a great map comparing rental prices and home prices. The map gives you a good feel about where to buy. Bright green being very affordable and Red being unaffordable. Portland is light green meaning it is probably better to buy. If you want to look at all the ratios yourself, just click on the map

If you like to move around every couple fo years, buying is not a good option, if you plan on living somewhere for 5 years or more, buying is definitely the better option. There are many variables to consider when you are crunching numbers; renting is fairly simple, you have your monthly rent and (hopefully) renters insurance. When you are buying, you have mortgage payment, with interest, yearly maintenance, and renovations, plus property taxes. Upfront you need a down payment, and money to bring to closing. If you prefer to look at specific numbers the New York Times has a great calculator to tell you exactly how much money you are saving. You can try it out yourself here.

I plugged in the average numbers from my neighborhood in southeast Portland, a 2 bedroom 2 bath home rents for about 1800 a month, and sells for around 279,000. I added an appreciation rate of only 2% because of current market conditions. Historically homes appreciate around 7% a year but I want this to be as close to true market conditions as possible. Looking at the data, between year 2 and 3 you break even between renting and buying. Once you hit year 3 you are saving about $400 a year, and it jumps about $1000 a year after that. In the Portland area, it makes sense to buy your home as long as you plan on living in it for 3 years.

There are of course more personal considerations that need to be made to help you decide whether buying a home is right for you but if you only look at the numbers, it makes sense.

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I think that renting was commonly thought of as “throwing money away” in the past; however, the volatile state of our economy is pushing more people to rent. Even some homeowners are packing up and moving into rental properties in order to save some money. The fact that they can save money will ensure that they can become homeowners again when the markets rebound. I think more people should consider this option instead of staying in a house they can’t afford. Most times this causes foreclosure and can actually decrease your chances of homeownership in the future.